Thai'ed up

It appears that the Thai generals are quick studies, and the swift reversal of the THB lockup for equity investment appears to have staved off a crisis. The trade of the year was SETI straddles, it appears, as the volatility in Thai stocks and, to a lesser degree, those across the region has been punchy, to say the least.

The moves in Thailand are probably more interesting from a macro than micro perspective, insofar as they demonstrate that policy mistakes can still have a material impact on asset prices and, by extension, investment performance.

With activist central banks in Europe and Japan, a potentially protectionist US Congress, and China continuing to accrue reserves at a farcical rate, the potential for policy mistakes in 2007 remains ample. Indeed, one could argue that the one significant bout of volatility observed in 2006- the May/June risky-asset meltdown- was the result of a policy mistake by the Fed, namely Bernanke's late April speech in which he appeared to indicate a willingness to fall behind the inflation curve. The subsequent meltup in inflation breakevens and gold then prompted a bout of substantial hawkishness to regain credibility, which sent risky assets sharply lower.

For now, the equity rally may have a bit more juice in the tank, though it does appear to be looking a bit tired. The dollar is getting interesting again, however, and Macro Man wonders if we won't see a meltup in EURUSD and EURJPY between now and the new year. Certainly no one has told the NZD that the dollar was correcting higher; while Macro Man has made nothing from the long side, at least he didn't act on an earlier impulse to short it.

Liquidity is clearly poor at the moment as traders, including Macro Man, squeeze in some last minute shopping. Macro Man is on holiday between Christmas and New Year but will of course check in every now and again. In the meantime, he wants to see both equities and the euro perform before considering whether to lighten up for 2007.